Latin America

Economic Snapshot for Latin America

October 14, 2014

Heading towards the end of the year, it is becoming more clear that Latin America’s economic performance in 2014 is going to be the worst since 2009. The economic outlook disappointed yet again in October as LatinFocus Consensus Forecast panelists made their 18th consecutive cut to the regional forecast, revising it down from the 1.3% that was expected last month to 1.2%. Although the slight cut was not nearly as sizeable as the slash observed in September, it certainly continued to reflect that analysts’ views are more pessimistic.

Moreover, panelists have become less optimistic about next year’s economic outlook. Forecasters cut their estimates for the region by 0.1 percentage points over the previous month and now foresee regional GDP growth of 2.4% in 2015. This is the fourth consecutive month in which the panel has lowered the 2015 economic outlook. In fact, panelists have cut the growth forecast by a total of 0.8 percentage points since January when Latin America’s economy was expected to grow 3.2%. This month’s downward revision reflects analysts’ less upbeat projections for Brazil, Chile, Paraguay, Peru and Venezuela. Panelists left their growth estimates unchanged for Argentina, Bolivia, Colombia and Mexico. Ecuador and Uruguay were the only economies for which panelists raised their projections.

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The final months of the year have provided further evidence that the U.S. economy is gaining traction and the consensus among many economists is that the Federal Reserve is on track to increase interest rates as early as Q2 2015. Analysts also agree that the recovery in the global economy is highly reliant on the performance of the U.S. economy, although downside risks to the global outlook prevail. 

The economies of the Eurozone and Japan are still weak and geopolitical tensions between Ukraine, Russia, and the West continue to weigh on foreign trade and investor confidence. Disappointing data in the Eurozone and Japan have affected the economic prospects for this year and next, prompting both the European Central Bank (ECB) and the Bank of Japan (BoJ) to ease their monetary stances. The ECB has embarked on a program of private-sector asset purchases (ABS) and is committed to increasing its balance sheet to 2012 levels. The BoJ is already purchasing vast amounts of assets through a program aimed at doubling Japan’s monetary base at least through 2015. The measures taken by both banks are aimed at boosting economic growth and lifting inflation expectations. However, the divergence in the economic and monetary policy outlook among the U.S, the Eurozone and Japan has caused the U.S. dollar to strengthen against most major currencies. In the same vein, currencies in many emerging economies have lost value against the greenback amid prospects of an interest rate hike in the U.S., their own economies’ weak fundamentals and declining commodity prices.

The adverse global scenario put pressure on currencies in Latin America—a region with a high concentration of commodity exports and where economies are continuing to struggle to deliver growth—in September and at the beginning of October. Analysts’ attention is shifting toward how U.S. monetary policy will affect emerging markets, particularly their currencies. Relative to other emerging markets, most economies in Latin America are in less advantageous positions when it comes to weathering adverse global conditions. This is mainly due to higher vulnerability to fluctuations in commodity prices. Moreover, within a context of currency pressures, the strong interdependence between the U.S. monetary policy cycle and monetary policy in most Latin American countries will present policymakers with the challenge of deciding whether to follow the Fed’s tightening cycle—and consequently temper their economic growth prospects—or to allow higher inflation as a result of a depreciation in the local currencies. These developments come at a delicate time for the region in which most economies are enduring a period of weak economic growth. 

Most analysts expect high volatility and faster exchange-rate depreciation in the main Latin American currencies in the months to come as the Federal Reserve ends its quantitative easing program (QE) in the coming weeks and investors anxiously await the Fed’s next policy move. However, analysts consider that these developments will not lead to a widespread currency stampede in the region nor more broadly in the emerging markets. They do recognize that the more vulnerable economies are likely to be affected.

In Brazil, recent economic data point to a slow recovery in Q3. In July, economic activity increased a seasonally-adjusted 1.5% over the previous month, which marked a rebound from the 1.5% contraction observed in June. In addition, August data related to industrial production showed that output rose 0.7% month-on-month in seasonally-adjusted terms, which matched the expansion tallied in July. However, more recent economic indicators suggest that a notable degree of slack will persist in the coming months: In September, the manufacturing PMI fell into contraction territory and business confidence fell for the ninth consecutive month, hitting the lowest level since March 2009. Conversely, sentiment among consumers improved in September. Against this background, LatinFocus panelists cut Brazil’s GDP prospects for this year by 0.2 percentage points over the previous month and now expect the economy to increase 0.3%. For 2015, the panel left Brazil’s GDP growth forecasts unchanged at last month’s 1.3%.

Although the outlook for Brazil is mainly affected by the country’s current economic performance, the result of the run-off of the presidential election scheduled for 26 October also plays an influential role. Aécio Neves, the Brazilian Social Democracy Party candidate who came in second place after a late surge in the polls, will face incumbent president Dilma Rousseff. Neves offers a clear break from the current economic policies. Marina Silva, who came in third place and whose party has hinted at support for Neves, recognized that the Brazilian society requires change, which cannot occur under the current administration. Meanwhile, Dilma Rousseff has signaled that she won’t drastically alter policy if reelected because she claims that the anemic economic growth rates are the result of external pressures.

In Argentina, GDP growth stalled in Q2 compared to the same period last year (Q1: +0.3% year-on-year). Sequential data, however, showed that GDP rebounded and increased a seasonally-adjusted 0.9% (Q1: -0.5% quarter-on-quarter). If the quarter-on-quarter data are confirmed, it would mean that the economy has exited recession. However, fears persist that statistics from Argentina’s Statistical Institute are still being manipulated. In fact, a congressional committee that publishes its own GDP and inflation estimates stated that GDP contracted 1.3% over the previous quarter in Q2. More recent data confirm that the Argentine economy is in a state of deterioration. Growth in economic activity was flat in July compared to the same month last year (June: +0.7% yoy) and industrial production contracted 2.9% annually in August (July: -0.7% yoy). In addition, consumer confidence fell to a four-month low in September.

A continued deterioration of Argentina’s economic situation is the most likely scenario in the coming months and, without a resolution to the holdouts case, the outlook is expected to worsen. The government is continuing to search for alternative ways to pay its restructured debt. On 30 September, the government deposited USD 161 million into Banco Nación Fideicomisos on 30 September in order to make a coupon payment on a set of bonds expiring on that date. However, U.S. District Court Judge Thomas Griesa responded publicly, stating that Argentina was taking illegal steps to meet its debt obligations. Moreover, Central Bank governor Juan Carlos Fábrega tendered his resignation on 1 October amid disagreements with the government’s approach to dealing with the country’s inflation problems. His successor, Alejandro Vanoli, is considered to be a loyalist to the Fernández administration. Since Vanoli took office, the Central Bank has announced a new set of measures aimed at raising demand for pesos and stopping the decline in international reserves. The Central Bank set a minimum interest rate that will increase yields for small deposits in local currency in order to curb demand for foreign currency. It is, however, unlikely that the new measure will discourage the persistent demand for dollars. Against this backdrop, LatinFocus Consensus Forecast panelists expect Argentina’s official GDP to contract 1.1%, which is unchanged from the previous month’s Consensus. LatinFocus panelists are increasingly skeptical about the country’s prospects for 2015. Following the 0.3% expansion that was expected last month, panelists now expect Argentina to contract 0.2% next year. 

Economists polled by LatinFocus lowered Chile’s GDP growth forecasts for 2014 for the 9th consecutive month and now see the Chilean economy increasing 2.1%. In fact, analysts have cut the 2014 GDP growth projection by a total of 2.0 percentage points since January when the economy was expected to grow 4.1%. The new estimate, which is down 0.1 percentage points over last month’s forecast, reflects the relentless deceleration in the economy. In July, economic activity rose a meager 0.3% annually (June: +0.9% yoy), which marked the weakest reading since March 2010. In addition, confidence indicators fell in September, suggesting once again that domestic demand is cooling. 

In the wake of slowing economic growth and deteriorating economic prospects, the government’s focus moved toward fiscal stimulus. On 30 September, the administration of Michelle Bachelet presented the 2015 budget draft to Congress. The government aims to increase total expenditure by 9.8% next year in a bid to revive the economy and fulfill some of Bachelet’s campaign promises in the areas of education, health and social welfare. The bill was sent to Congress and is expected to be approved before the end of November.

Inflation expectations for Latin America were unchanged over the previous month in October. LatinFocus panelists expect the regional average to close 2014 at 12.5%. Economists lowered their projections for 2015, easing concerns regarding Venezuela’s ballooning inflation expectations. They see inflation closing next year at 11.1%, which is down slightly from the 11.2% projected in September.

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